Since its first announcement in mid 2012, the sole existence of the European Central Bank’s outright monetary transaction (OMT) program has been generally believed to have calmed down temporarily soaring interest rates for tumbling Eurozone countries. Despite its effectiveness in mitigating the currency union’s inherent multiple equilibria problem, there is an ongoing debate about OMT’s undesirable potential for weakening fiscal discipline and provoking risk externalization. Following Merton (1977), we argue that OMT’s apparent insurance mechanism can be modeled as writing a put option on government bonds. We propose an alternative instrument for managing the risk of a European sovereign debt crisis that explicitly compensates the insurance guarantor for her risk-sharing activity: European Puttable Bonds (EPBs). EPBs are intended as a temporary and incentive-compatible refinancing instrument, simultaneously facilitating the rollover of sovereign debt, fostering crisis prevention efforts, and reducing the risk of multiple equilibria usually caused by high government debt levels. The paper’s theoretical contribution is twofold. First, we model a financially distressed government’s borrowing decision in the context of EPBs, which is a function of (i) the magnitude of conditional coercive measures and (ii) the presumed exercise boundary of the embedded put option. Second, applying option pricing theory, we derive the embedded put option’s corresponding strike and equilibrium price. Finally, we calibrate our model to Portugal’s pre-bailout situation in 2010. Our model suggests that very reasonable conditional consumption restrictions (a reduction of less than 3% of GDP in case sovereign debt exceeds its sustainable limit) are sufficient to decrease expected government indebtedness in return for an insurance premium (put option price) below 2% of the EPBs’ notional, i.e., significantly less than the recurring interests paid by Portugal at that time.